Today’s nosedive on Wall Street is exclusively tied to doubts about a budget deal raised by the weekend impasse. As bleak as the current situation is being portrayed, there should still be an agreement between the President and the Congress by Christmas Eve. They are really not far enough apart on the political sticking points to justify a last-minute collapse. The weak link is Bob Dole, who is clearly itching to do a deal. We are now reminded of how close we got in October 1989 to getting a budget deal that would have included a capital gains tax cut. The entire year’s work and President Bush’s mandate on taxes went down the drain when Bob Dole, then Senate Minority Leader, insisted on cutting a deal that left it out. On Meet the Press yesterday, Dole was back at it again. If there is no agreement on a budget reconciliation by this weekend, he said he would be happy to forget the whole thing. He would give the President a continuing resolution that would push the budget impasse into 1996, effectively aborting the tax cuts that House Speaker Newt Gingrich has said are the Crown Jewels of his Contract With America. This is the strategy of the liberal Democrats both in Congress and around the President, who see an opportunity to divide Newt (the bad guy) and Dole (the good guy) and get the same outcome as in 1989.
In 1989, the situation was reversed, with a Republican President in the White House who had just been elected on a promise to cut the capital gains tax to 15% and index gains against inflation. Congress was in Democratic hands, but except for the liberals, there was clear support among the Democrats for the tax cut. With Newt Gingrich leading the charge, the House passed the tax cut and sent it to the Senate attached to the budget reconciliation. The Senate Democrats, led by Majority Leader George Mitchell and New Jersey’s Bill Bradley, fought the attachment on procedural grounds, which meant they could block action with only 40 votes. The Gingrich forces, with Jack Kemp in the Bush Cabinet, urged the President to threaten a veto of any budget that did not include capgains. At noon Friday, October 13, the wires carried reports that the White House had thrown in the towel. The Dow Jones Industrials fell 190 points that afternoon, 7% off its opening that morning. At first, we blamed Budget Director Richard Darman for caving in. We quickly learned it was Bob Dole who was eager to cut a budget deal and did not want to get into a messy public battle over a tax cut when the budget was out of balance.
In retrospect, Dole’s cave-in ended the Reagan Revolution. The economy went into decline, federal and state tax revenues declined and public spending climbed. An attempt in 1990 to cut the capital gains tax gave way to the 1990 budget deal, which broke President Bush’s “read-my-lips-no-new-taxes pledge.” Dole was, of course, also a key player in that deal. Minority Whip Gingrich fought the White House on that as well. We now have Dole so certain of his hold on the GOP presidential nomination that he is once again tempted to abandon the revolutionaries in his party, this time the Gingrich Revolution. As in 1989, the liberal Democrats could never hope to defeat a concerted campaign by the GOP to push their election mandate to conclusion. They now see the possibility of again driving a wedge between Gingrich and Dole.
Dole now clearly believes his low poll ratings relative to President Clinton’s have to do with Clinton’s success in positioning himself against the Gingrich Revolution. As Robert Novak points out in his column this morning: “Dole has been told by trusted advisers to...make a deal now, even if it confirms government-as-usual and don’t shut things down again before Christmas. Above all, he has been counseled, step well away from Gingrich. The implicit assumption is that there is really no menace from the right in the Republican primaries.” The column may have had some effect; late this afternoon Dole said if there is no deal, the Senate might be in session on New Year’s.
If there is going to be a budget reconciliation by Christmas Eve, the President has to be willing to seriously negotiate. He does not have to seriously negotiate, however, as long as Dole is indicating he is prepared to throw in the towel on Friday night, as he stated yesterday. Even if President Clinton would like to have a budget reconciliation by the weekend, liberal Democrats will refuse to join him as long as Dole gives them reason to hope for a last-minute ditching of Gingrich’s Crown Jewels. The correct strategy is for the GOP leadership to insist that if there is no deal by Friday, the Congress will return on Tuesday, and stay in session for as long as it takes to get a budget reconciliation. To re-open the government, they could give the President continuing resolutions that last for three days at a time, right into 1996. If, in addition, they would alert the financial markets that the capgains tax cut would remain retroactive to January 1, 1995, the President would be able to tell the liberal Democrats that he could not sustain his current strategy against that kind of resolve.
As the weekend discussions made clear to the press corps, the only figleaf the President has left in his month-old promise to present a seven-year balanced budget, using CBO numbers, is a technical escape hatch. House Budget Chairman John Kasich agreed to have CBO economists consult with the President’s economists, who have rosier economic assumptions. If the GOP were unified in the Senate and House in its resolve to stay in session for as long as it takes, it could throw a bone to Clinton on the economic assumptions. This would permit the President to take more credit for playing his widow-and-orphan card. None of this will really work, though, if the Republicans continue to negotiate among themselves, trying to bridge differences between House and Senate. Clinton will play hardball to appease the congressional liberals. It is up to the Republicans to insist they will not take no for an answer.
Part of the problem for Gingrich remains his insistence on holding the debt limit hostage to the reconciliation. It is a separate question that only confuses the public, which is why I think he shows up so poorly in the polling match-ups. He should let it go and put all his resources into the fight over reconciliation, using the power of the purse. In the special election in California last week, where voters had to take the trouble of finding out what was going on before they cast ballots, the anti-Gingrich Democratic candidate was buried in a landslide by the Republican -- in a district that went for Clinton in ‘92. This tells us that the informed electorate backs the GOP on this issue. By holding firm in alliance with Gingrich, Dole would be helping himself with that informed electorate, but his tendency is always to be stampeded by the Beltway crowd.
Gingrich has been driven to the bench in the public discussions, but he can do all that needs to be done by issuing short statements as required, to demonstrate his resolve. The nosedive in the financial markets today of course helped his case, fortifying the position he took a week ago in predicting steep declines on Wall Street if there is no budget. The President watches Wall Street enough to know that he has squeezed the lemon as much as he can. We said last week it would go up to Christmas Eve before a deal would be struck. It can still be done as long as the Republicans stick together.